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Consultants' Commentary: FX

Moving from planning to action during the ongoing fire drill in Europe by Craig Jeffery, Strategic Treasurer.

The continuing anxiety in Euro-land has kept many treasury groups busy with both planning for country and currency situations and taking precautionary actions. Some companies are moving cash selectively within euro-denominated countries and others are moving funds out of euros entirely to reduce their exposure. And more companies are managing counterparty risk more closely across a range of short-term asset classes and maintaining stricter diversification standards.

As the Greek crisis has played out, multinational and European-centric firms have shifted their mind-sets and actions in two notable ways. First, the presumption that a euro breakup or a country’s leaving the euro was not very likely has been replaced by a growing conviction that ‘some countries’ leaving the euro is all but inevitable and the question is when, and whether it will be an orderly or disorderly exit. Second, companies tracking with increased concern what is happening in Portugal, Ireland, Italy, Greece and Spain (PIIGS) have gone from simply modeling basic scenarios to taking preventive steps. A number of these steps have been publicly communicated.

There are several main trends with cash movements. First, many companies moved most of the cash they had in Greece to other countries some months ago. Second, significant cash stores held in the other PIIGS are regularly moved to other euro countries perceived as far more stable, such as Germany. Third, some companies are moving funds out of euro-based countries to non-euro European countries, such as the UK or Switzerland. Finally, we continue to see and hear of some companies moving their euro cash exposures into U.S. dollars even if these funds are held within Europe.

Moody’s placing over 100 financial institutions on review for downgrade in mid-February formalized a long-running view of increased counterparty risk with many European financial institutions. Parking cash is an ongoing concern when there are monthly fire drills that seem to highlight individual counterparties, sovereign counterparties and even certain money-market funds. Transparency and visibility have been on treasurers’ minds acutely since 2008 and the requirement to further calibrate the level of risk has challenged many firms. The work of monitoring and calibrating these exposures is keeping treasurers very active.

Companies are modeling an increasing number of possible scenarios and detailing what they would do in each situation. What is different is that over the past six to seven months, many of the initial steps of these plans have become operational, as in cash movement. The second step of their plans is being well-modeled and estimated (i.e., how would we generate and deploy cash in the right locations). These steps include borrowing arrangements as well as adjustments in working capital.

Many companies are sitting on a far larger pile of liquidity than during the worst part of the financial crisis. And they are moving it rapidly, rather than simply parking it, as they carefully monitor and calibrate the various and volatile risks that confront their organizations.

Craig Jeffery is managing partner of Strategic Treasurer, an Atlanta-based treasury consulting company formed in 2004.

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